The world is in conflict but the stock market keeps going up – what am I missing?
Why is the stock market rising amid global conflicts in 2025?
In 2025, the world is grappling with significant geopolitical uncertainty. Tensions between the U.S. and China have wavered, the tragic conflict between Israel and Iran has escalated, and the ongoing war between Russia and Ukraine persists. Yet, despite these challenges, most major global equity indices have posted gains year-to-date. Only three indices – the Russell 2000 (U.S.), Stockholm 30 (Sweden), and Nikkei 225 (Japan) – are in negative territory [1]. This raises a critical question: why are markets rallying in the face of such turmoil?
Historical context: markets during conflicts
To understand this phenomenon, it’s useful to examine how markets have historically performed during major conflicts over the past century. Using the S&P 500 as a proxy, the table below summarises market performance during 12 significant geopolitical events, tracking returns over 1, 3, 6, and 12-month periods post-event.
Table 1. S&P500 performance during military and geopolitical conflict
Only a third, or 17 out of 48 observed periods, produced negative returns across these 12 events. Notably, the three conflicts with the largest 12-month drawdowns (highlighted grey in Table 1.), coincided with economic recessions. In aggregate, the S&P 500 posted positive 12-month returns in 75 per cent of these cases, with an average gain of 8.6 per cent. This suggests markets often remain resilient, even during turbulent times, unless compounded by economic downturns.
Why are markets rallying in 2025?
Two primary theories explain the current market resilience:
Liquidity support: According to CrossBorder Capital, the Federal Reserve and U.S. Treasury are actively managing bank reserves to maintain market liquidity, despite hawkish rhetoric on inflation. Recent data indicate the Treasury is injecting liquidity through increased short-term debt issuance, offsetting the Federal Reserve’s quantitative tightening efforts. This liquidity acts as a buffer, supporting asset prices.
Market optimism: Investors appear to be looking beyond current conflicts, assessing their broader economic impact as transitory. The market seems to be betting that these geopolitical events will not derail global growth, adopting a “this too shall pass” mindset.
Lessons from the Dow Jones: a century of resilience
The Dow Jones Industrial Average, affectionately known as “Papa Dow,” celebrated its 129th anniversary in May 2025. As Figure 1., reveals, over its long history, the Dow Jones index has weathered numerous conflicts, from world wars to regional crises.
Figure 1. Dow Jones – a history of conflict
Source: Carson Investment Research, FactSet 06/01/2025
Figure 1., reveals two useful insights. The first is that geopolitical events are inevitable because they are a consequence of the human condition. Conflicts and crises result from inescapable human character flaws and are thus a recurring feature of global history, with 2025 being no exception.
And second, remaining invested pays off. Despite short-term volatility, markets have historically trended up over time because the best businesses, by definition, become more valuable. The Dow’s long-term growth underscores the value of maintaining a long-term investment strategy, even during periods of uncertainty.
While today’s geopolitical tensions are concerning and frightening for those experiencing them firsthand, historical precedents and current market dynamics suggest equities can remain resilient. Today, liquidity injections and investor optimism continue to support equity markets, and the Dow’s 129-year track record reinforces the importance of remaining invested. While no one can predict the market’s next move, nor the next crisis, history reveals markets more often reward those who remain steadfast.
References:
[1] Business Insider, https://markets.businessinsider.com/indices, June 17 2025
Dean Curnow joined Montgomery Investment Management in June 2016.
Dean joined the firm from Colonial First State, where he was a Consultant for Retail Sales for 2 years.
Prior to this, Dean was also a Relationship Manager with the Commonwealth Bank of Australia, where he spent 5 years working in Retail Banking.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
